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Here’s the entire text of the Q&A from Oracle’s (ticker: ORCL) fiscal Q2 2006 conference call. The prepared remarks are here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Question-and-Answer Session

Operator

Thank you our question and answer session will be conducted electronically. If you would like to ask a question, you can signal or type us in the “*” Key followed by the digit “1” on your touch tone telephone. If you are turned in on your speaker phone, please make sure that your mute function is turned off to allow your signal to reach our equipment. We do ask that you do limit yourself to one question. Again it is “*”, “1” if you would like to ask a question.

We will go first to Jason Maynard with CS First Boston

Q - Jason Maynard

Hi, good afternoon, guys. Larry, Database grew 8% and RAC was up bigger than expected. Is Release 2 looking like the catalyst to drive adoption? And for Safra, deferred revs were higher than we had expected. Is this due to strong support renewals on the application side? Thanks.

A - Lawrence Ellison

Jason, the big issue with moving to RAC is making RAC as easy to use, a RAC of 64 machines or a grid of 64 machines, as easy to use as one computer. And we have been working at it, we have had Grid working for a very, very long time, but having all the management tools, being able to patch 64 separate machines as if it were one machine, to tune it and have all the tuning to be completely automated is what’s been blocking us from mass adoption. I think we’re largely over that hurdle now, though it gets better and better with every release. And I think we’re going from the early adoption phase into again, the next phase. And we think over the next three, four, five years, the vast majority of our customers will be using RAC even for small installations. They’ll use a couple of small, a couple of tiny Dome machines, or a couple of small Sun machines to run their applications. But they’ll always have at least two computers on the Database. It’s all about now, not does RAC work, but is it absolutely as easy as a single computer?

A - Safra Catz

Yep, and Jason, on the deferred revenues, it’s basically support as usual, and the acquisitions really and the support from the acquisitions. So that’s the only difference really.

Q - Jason Maynard

And are you seeing on the support side, I mean it sounds like renewal rates are probably in excess of 90% plus. I mean what…

A - Safra Catz

Yeah. 95 plus. They’re going just really fabulously.

Q - Jason Maynard

I don’t want to get ahead of myself too much here but Siebel had some challenges, right, with customers renewing maintenance contracts. Are we crazy to think that perhaps we could see an acceleration in renewals now that Siebel is in your hands?

A - Lawrence Ellison

Well, I think we have invested very, very heavily in PeopleSoft customer support. We said we were going to keep 90% of the engineers and 90% of the support people and actually redoubled our efforts. And we’ve measured customer satisfaction and seen substantial increases in customer satisfaction among the PeopleSoft users post acquisition. We think that same exact thing should happen with the Siebel customers and their renewal rates should go up as well. We’re going to work very, very hard to achieve that. Our plans are similar. We plan to retain the bulk of the Siebel engineering team and the bulk of their support team, and we’ll be adding Oracle people to again get those satisfaction levels at the same level that we have right now at PeopleSoft and Oracle. Let me say that, I’m going to get myself in a little bit of trouble here, but we’re trying to be the very first company to win the JD Power award for support excellence, and we’re getting close. I don’t know if I just killed it right there, but we are really focusing on delivering a very, very high level of support to our customers.

Q - Jason Maynard

Great.

A - Lawrence Ellison

We think that’s what motivates them to buy more software.

Q - Jason Maynard

Great. Thanks. Good quarter.

A - Lawrence Ellison

Thank you.

Operator

And we will move to next to Heather Bellini with UBS.

Q - Heather Bellini

Hi, thank you. Couple of questions. First, I think one thing, the Database business didn’t reaccelerate as fast as some had hoped, I think off of last quarter. And I was wondering what would you expect as you look out next quarter? And, Larry you made the comment on the last call that I think if you look on an LTM basis you would view this segment as a 10% grower. When do you think we could get back to that double digit range?

A - Lawrence Ellison

Actually if currency hadn’t moved from last quarter to this quarter, we would have grown exactly 10%, right? We got 2% help last quarter. With the 2% help it would’ve been 10% this quarter. So we’re pretty happy with the results, the Database results. As Charles mentioned, every place else in the world, in North America, Asia Pac, Latin America, every place else in the world that we measure, we’re over 10%. Europe is just in a bit of a funk. And if you look at the slowing economies in Europe plus the unfavorable currency translation, it’s really hard to fight both of those headwinds.

Q - Heather Bellini

Are there any signs that that could get better or reverse itself many a little bit in February or is it still too early to tell?

A - Lawrence Ellison

We know our pipelines are stronger in Q3 than they are in Q2. As Safra said, the pipelines look very, very strong in Q3 but we’re expecting another 2 points down in currency. So the business looks very, very strong, but currency is going to wrong way.

Q - Heather Bellini

Great. Thank you very much.

Operator

And again it is “*”, “1” if you would like to ask a question. We will move now to John DiFucci with Bear Stearns

Q - John DiFucci

Yes. Thanks. Just a follow up to Heather’s question on Europe there. Even on a constant currency basis, it looks like it dipped, Europe hasn’t been great for anybody lately over the last year, or year and a half. But this quarter Database on a constant currency basis was flat and Applications was up 1%. I’m curious if, so are things getting worse there? It sounds like your pipeline looks better, Larry, but what about in your guidance, what should we, what’s implied in Europe? Are you expecting it to actually get better next quarter or are you just assuming it’s going to be in the “funk” you call it?

A - Lawrence Ellison

No, I think Europe is going to get better next quarter. But again, we’ve got these two issues. One is some of the German economies, excuse me, some of the European economies are growing very, very slowly like Germany and Italy. France isn’t doing so well either, and the unfavorable currency translation is kind of a double whammy. Nonetheless, we see very strong pipelines in Europe for Q3. So the business, the underlying business looks pretty strong versus Q2. But we expect currency to take yet another downturn in Europe. So we’re kind of thinking that those things will cancel each other out. But we’re optimistic we can do better.

A - Safra Catz

Yeah and I think also just in gross numbers, we had a tough comparison for Europe from last year. And so I think we’ll have a little less of that and so I think that you’ll see that things look a little bit better there too.

A - Charles Phillips

I think the other thing to keep in mind, it’s the small deals have been fine. And it’s been the large deals, and that’s an indicator of the economy. But if you look in the pipeline, some of those are starting to come back. Hopefully we’ll see that happen in Q3.

A - Lawrence Ellison

And some of the big European deals that we have signed, we haven’t been able to recognize the revenue. In fact, we’ve signed a number of large deals where we can’t recognize the revenue. The big Air Force deal, we haven’t recognized the revenue. The big Russian deal, we didn’t recognize the revenue. So we have very, very conservative revenue recognition. We’ve recognized very little revenue for example since the Retek acquisition because our rev rec policies are very different than theirs.

Q - John DiFucci

Just a quick clarification on that, Larry you said you recognized no revenue from the Air Force deal this quarter?

A - Lawrence Ellison

That’s correct. None.

Q - John DiFucci

Okay.

A - Safra Catz

We weren’t planning on it either, the way it rolls out. We weren’t expecting to.

Q - John DiFucci

Okay. Thank you.

Operator

We will move now to Adam Holt with J.P. Morgan.

Q - Adam Holt

Hi good afternoon. I had two questions on the applications business. Obviously you had a real nice recovery from the first quarter. To what extent did some of the transaction flow that fell out of first quarter that you talked about positively impact second quarter? And secondly, given the commentary you made about the strength in renewals on the applications maintenance side I would have expected to see maintenance revenue for applications increase sequentially in second quarter. I was wondering if you could comment on that? Thanks.

A - Charles Phillips

Yeah you’re right. The deals that we talked about in Q1 slipping out of the quarter did close so none of those deals went to a competitor. And a lot of them closed in the first week or two. Some of that always happens, but it was a little bit higher than normal this quarter and so we started off this quarter in pretty good shape, as we did Q3 as well.

Q - Adam Holt

And on the maintenance revenue in the applications business, I would have probably expected to see that increase sequentially given that it sounds like the positive tone on the renewals.

A - Safra Catz

Yeah. It’s, I don’t know specifically what the impact is. Anyway it’s for things the way we recognize what we’re recognizing in this quarter is stuff that was paid for whatever months ago since we’re doing it really a month at a time. So sort of a renewal rate in particular during the end of the quarter wouldn’t make too much of a difference frankly. I don’t think it’s any different than the typical seasonality, but I’ll take a look at it after the call and we can talk about it.

Q - Adam Holt

Okay. Just one last question for you. What was behind the substantial re-acceleration in a couple of the options you highlighted, in particular the Enterprise Manager? Thanks.

A - Charles Phillips

I don’t think there’s anything specific but we have had more focus in the sales force with more overlay groups, as we see more opportunity and we’re going to do that with Security in the coming quarter. So a lot of these areas around the Database are bigger opportunities than we probably first imagined, everybody was so focused on the Database. But the Options Enterprise Manager, RAC and especially Security now is going to be a big one.

A - Lawrence Ellison

Okay. I think there’s one interesting thing, in terms of Enterprise Manager. As we have gone to our own backup technology, as we have gone to what is called Automated Storage Management, as we have gone to Grid Computing, you do need management tools to manage a grid of computers. We have management tools that do that. Because these are rather innovative features, Automated Storage Management and Grid Computing, companies like BMC, VERITAS really don’t have tools or systems that apply to those features; therefore, we’re selling a lot more of our own management tools rather than competitive management tools. We’re selling an awful lot of our own Storage Management systems, so we’re competing effectively against third party management companies and effectively against VERITAS in the file system area and soon in the backup area with our new announcement of Secure Backup.

A - Charles Phillips

We have also expanded the number of platforms we support. We used to only manage Oracle applications and infrastructure, but now we manage WebSphere, WebLogic, other operating systems. It’s a bigger footprint we’re going have out in the market.

Q - Adam Holt

Thank you.

Operator

Our next question will come from Stephen Mahedy with Banc of America Securities

Q - Stephen Mahedy

Thanks. First question would be on the guidance looking at Q3, and just guidance broadly speaking. A quarter or two back we had some full year top line guidance and last quarter pretty much kind of resolved to some earnings guidance. It sounds like the pipeline is getting stronger. Is there any reason to believe that some of the guidance that was out there previously for both top line and earnings would move in one direction or another?

A - Safra Catz

Did you talk, are you talking about Q4?

A - Lawrence Ellison

I think, the annual guidance that was given early in the year.

A - Safra Catz

Oh, yeah.

Q - Stephen Mahedy

That’s right.

A - Safra Catz

Yeah. I think the only, our only thinking was the only really significant adjustment would be the currency change. And you know, now we have Siebel, so we thought it made sense to since we’re not 100% sure Siebel will close, but we believe that it will actually be closed the entire quarter we were just planning on giving you that number, the moment we close.

Q - Stephen Mahedy

Okay, very good. And then just on products and specifically Middleware, Charles had given some detail on kind of the growth of the business and Larry mentioned gaining share. Are there any other instances you can give us or just further backup to support the share gains in Middleware vis-à-vis case examples?

A - Charles Phillips

If you look at the trailing four quarters we were up 24% compared to a decline of 1% for BEA. If you look at the core Middleware excluding our legacy development tools that was up 29% in the quarter. The other thing that we have done is we have certified all of our applications on our middleware, which now just creates a huge potential to go back into the install base and up sell Fusion Middleware.

Q - Stephen Mahedy

Okay. All right. Thank you.

Operator

We will move now to Brendan Barnicle with Pacific Crest Securities.

Q - Brendan Barnicle

Thanks. I just wanted to be clear on Q3 guidance on Database. You had a big sequential ramp from Q2 to Q3 last year in Database. Should we assume something similar? Are we going to be able to see year-over-year growth in the Database side, just exclusively on the new licenses side, would that be mid to high single digits?

A - Lawrence Ellison

Again the pipelines look very strong in Q3 as compared with Q2, but our guidance is what our guidance is.

A - Safra Catz

Yeah. We don’t break down the guidance by product. We’re not going to start today.

Q - Brendan Barnicle

Okay. And just as a house cleaning, do you have what stock option compensation expense would have been in the quarter?

A - Lawrence Ellison

What were the stock option expenses again? Do you have the number?

A - Safra Catz

Yeah. I think it’s less than a penny. We’re thinking, for the year did you ask for the year or for the quarter?

Q - Brendan Barnicle

Well, both would be good.

A - Safra Catz

Okay. I think it’s less than a penny so it would be about 3 cents for the year. Is what we’re thinking.

Q - Brendan Barnicle

Terrific. Thank you very much.

A - Safra Catz

Now, again, that was including Siebel? Okay. That’s we’re already starting to tell you our Siebel numbers here. That would include our estimate for Siebel too.

Q - Brendan Barnicle

Okay. Great.

A - Safra Catz

Okay?

Q - Brendan Barnicle

Yep. Thank you.

Operator

We will move now to Brent Thill with Prudential

Q - John Walsh

This is John Walsh for Brent Thill. On the 10g Release 2, do you see that as a catalyst going forward and can you give us an update, I see you gave us 30% of your installed base of Database customers on 10g, as maintenance ends on some of the older products is there a need for those customers on 8, and 8i. and even the original version of 9 to move off that?

A - Lawrence Ellison

No, there’s no need for them to move off of that. But I think there are a lot of advantages to moving to 10g. Automated Storage Management which improves performance, lowers the amount of labor to run the database. But there are options you then would buy. You will buy the RAC option, you will buy management tools, and we’ve seen acceleration in those two things. As you move from the old style of database computing where the application has one and only one Database server, although that’s all IBM can have. I’ll just do a little advertisement here. IBM DB2 can have one Database machine running SAP. Microsoft can have one Database machine running SAP. We can have between one and 64 machines running SAP. So we have, we have this great capability that is unique in the marketplace. And with that, if you want to adopt Grid, you have to buy the RAC option and you’re probably going to want to buy the enterprise management tools, or what’s called Grid Control to manage that array of computers.

A - Charles Phillips, Jr.

The other thing that will help us is just the trend in the industry. Clustered machines are now 16% of all server shipments, according to IDC. If you look back a year ago, they said it was only 12%, so the industry is shifting in our direction.

Q - John Walsh

Any update on the breakout that you can give, you gave 30% on 10g on the some of the other versions?

A - Safra Catz

No.

Q - John Walsh

Okay. Thanks.

Operator

We will move now to Andrew Brosseau with SG Cowen.

Q - Andrew Brosseau

Great thanks. Can you help me understand what’s happening with the cash flow particularly given the strength you’re seeing on renewals on the growth in the maintenance stream? I’m surprised that cash flow has slowed down here. In fact is down year-to-year so far in first half. So should we expect that to pick back up here or what’s really happening there?

A - Safra Catz

No, we had a very significant tax payment in the quarter from the American Jobs Creation Act. Our HIA dividend, we, as you may remember, brought back a very large amount of money that was permanently invested outside the United States, and so we had a tax payment during the quarter which impacted it, and also another tax payment that would have been at a different earlier time, we paid in this quarter also. That’s the only thing going on there.

Q - Andrew Brosseau

So should we, sounds like we should expect cash flow to start growing again in second half of the year and probably more in line with the overall growth in maintenance?

A - Safra Catz

Yeah, absolutely. The HIA’s dividend tax payment is a one-time thing.

Q - Andrew Brosseau

Okay. Great. Thank you.

A - Catherine Evans

Okay operator, we have got time for one more question.

Operator

And our final question will come from David Hilal with Friedman, Billings, Ramsey

Q - David Hilal

All right. Snuck in there. First, headcount in Europe seemed to move up a bit and wanted to know what the driver there was, or where those people, what part of the company are they in? And then Larry, you talk about the 20% EPS growth over the next few years which is certainly impressive, but I was wondering if you could take a stab as to what percent of that would be organic versus acquisitions. Thanks.

A - Lawrence Ellison

Let’s see. First question was the growth in Europe has mainly been in consulting. The consulting business is growing again. As we know the consulting is a feast/famine business, where the consulting business shrunk a few years ago. It’s now growing very, very rapidly, around the world by the way. North America, Asia Pacific and Europe. There’s more demand than we can supply in consulting. That’s the headcount growth.

As far as the split between organic and acquisition, I would expect more or less of an even split. Between that, in terms of growth via acquisition and growth via innovation and/or organic growth. But it’s going to be a combination of the two. We don’t think we can get there, that 20% EPS growth for the four or five year plan without some strategic acquisitions. Again let me emphasize, whatever acquisition we make, that acquisition is aimed at making us Number One in the software category in which we participate. Or, such a strong number two that we can challenge for a number one over time. The software industry is actually very easy to understand. The lion’s, almost all the profits go to number one and a little bit goes to number two. But to meet our goals of EPS growth 20% per year over a five year period, we have to increase the number of software categories where we are the leader. I think we can do that. We think we can get to number one in Middleware, we think we can strengthen our number one position in Database. We think we can get to number one in Middleware and we think we can increase the number of targeted industries and applications where we can be number one globally. So we’re pretty optimistic that we can pull this off.

A - Safra Catz

Yes. The other headcount growth obviously is in development outside of the United States. In a number of different countries. And that’s it.

Operator

And now there are no further questions. I will turn the call back to you Ms. Evans.

Catherine Evans, Investor Relations Program Manager

great well thank you everyone for participating in today’s call. The telephone replay will be available for 24 hours, the replay dial in number is 7194570820, again that’s 719 457 0820, pass code 6107194. You can also access the website broadcast at Oracle.com/investor which will be available through December 22nd. Thank you and I will turn the call back to the operator.

Operator

Thank you. That does conclude today’s conference, we do thank everyone for their participation.

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